Goods and Services Tax for the layman

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2 GST on company s sales (selling goods) is called Output Tax. GST on company s expenses (buying goods) is called Input Tax. Another example: GST at 6% Levels Before GST Input Tax Output Tax GST Incurred Raw supplier RM 1.0 nil RM 0.06 RM 0.06 Manufacturer RM 5.00 RM 0.06 RM 0.30 RM 0.24 Retailer RM RM 0.30 RM 0.60 RM 0.30

3 Consumer RM10.00 RM 0.60 Is GST Cumulative? It is erroneously believed that since everyone pays the 6 % along the chain, the end consumer who is at the end of the supply chain will have to bear multiples of 6 % (like 6+6+6=18%). Fortunately, this is NOT the case and therefor the Malaysian GST is NOT Cumulative. From the above diagram, you can see that the Manufacturer pays GST (Input Tax) to the Raw Material Supplier and in turn charge GST (Output Tax) to the Retailer. In this case, his Output Tax (0.30) minus his Input tax (0.06) is RM 0.24 and is termed tax positive; he will need to pay to the Custom Department. Likewise the Raw Material Supplier who collects the GST from the manufacturer will have to pay to Custom (assuming that he did not pay GST to anybody above him). Along the chain, the Retailer will also charge GST on his end Customer. Now, the Retailer also need to pay the Custom department since he is also tax positive ( =0.30) he in turns need to pay to the custom department (he pays RM 0.30). Now if you add up the total sum of tax paid to the custom by the raw material supplier, the manufacturer and the retailer equals RM0.60 which is equal to the amount paid by the customer! So you can see it is the end customer paying the 6%. The raw supplier, the manufacturer and the retailer is just passing the payment back to the Custom

4 Department, although each do not pay the same amount, but their sum total equals the amount paid by the end customer. It is evident from this diagram that the raw supplier, the manufacturer and the retailer did not increase their product price but only added the GST component along their way. This however is only in theory as in an actual run, SOME increase do creep in because of added component cost like the administrative cost as the result of implementing the GST! You need software, you need hardware and you probably need extra account staff to help manage it. The process of collecting and remitting GST GST registered businesses are allowed to deduct the Input Tax from the Output Tax, and remit only the net to the C&E. This will probably be done via a GST return to be submitted to the Custom & Excise Department on a quarterly basis. Where Input Tax exceeds Output Tax, the business will be entitled to a refund. In the Malaysian GST ruling, companies with annual revenue of below RM 5 Million have to report on a quarterly basis. Companies with above RM 5 Million annual revenue will have to report monthly. When they do their reporting, they can also file their claims if they are tax negative (if their input tax is more than their output tax). What it will mean to the man in the street is:- 1) As he is presently paying SST of a total of 16% then when GST is enforced, he will only pay 6%; in other words, he pays less! 2) Officially, goods and services should not cost more to the manufacturer as the tax is collected on behalf of the

5 government so consumers only pay an extra 6% which must be debited to the government. But when put in practice, an increase in price is inevitable due to the additional administrative cost. 3) If you are a manufacturer and you also buy from a raw material seller, then whatever extra that you paid for (6% of the cost of your purchased goods) is passed onto the end buyer. You should then pay extra 6% and charge extra 6% and you should be even. The tax that you paid to the supplier of raw materials is termed Input Tax and the tax that you charged to your buyer is termed Output Tax. In a normal circumstance, your Input Tax should equal your Output Tax. 4) Now a complication arises because not all things are taxable! There are taxable items termed Standard Rated as well as items that are accorded Zero Rated like essential food items (rice, fish and cooking oil). Then there are items termed Exempt like hospital services. Another item that does not go under the GST is Out of Scope items like government services. Standard Rated Standard-rated supplies are goods and services that are charged GST with a standard rate. GST of 6% of sale price is collected by the seller and paid back to the government. This is carried down the chain until it reaches the end user. Ultimately it is the end user who pays the 6%. Eg. Processed Goods, Entertainment, Garments, Vehicles. Zero Rated These are taxable supplies that are subject to a zero rate. Businesses are eligible to claim input tax credit in acquiring

6 these supplies, and charge GST at zero rate to the consumer. In this case the end user does not have to pay 6%. Eg. Rice, Vegetables (non-fruit), Utilities, Chicken, Exports. The list is expected to include more items at a later date. Exempt Supplies Exempt supplies are nontaxable supplies which are not subject to GST at the output stage that is, when supplied to the consumer. However, the GST paid on input by the businesses cannot be claimed as tax credit. Eg. Rail, Buses, Taxi, Toll, Private health, Residential Property. Out of Scope Supplies Out of scope supply is a supply which is not within the ambit or boundary of GST. Thus, GST is not applicable on such supply. Eg. Government supply and supplies by Statutory Bodies So if you are selling a Zero Rated Tax item, then you cannot charge GST on your buyers. Well and good but you still have to pay GST for some of your semi-process items (like transport charges)! You pay GST upfront and you cannot charge GST at the end buyer? So you will loose right? OK, you then have to register with the Custom s Department in order to claim back the GST that you paid for previously. Under the GST Enactment, businesses that earn less than RM500, revenue annually need not register with the Custom s Department. But if you do then at least you can claim back GST from the Custom s Department that you have paid for. This is a simple view of GST. It is a lot more complicated when you go into the implementations. It is advisable that you engage a consultant

7 because you cannot afford to err as the penalty is heavy and retrogressive! An Example of Price Increase If you are a property developer, you cannot mark up your house price because under the GST Act, residential property is exempted from GST. But unfortunately, building raw materials have GST components and so will cost more. Ultimately, the cost of building a house increases so the extra cost will be passed unto the buyer. So even though the developer can t charge GST on your invoice, they will have to mark up the price of the house! And you pay the price, GST or no GST!